Investment Strategy Review: Revisit the Fallen

by: Leigh Drogen

Just as important as knowing what you do well in order to exploit your talents, is understanding your weaknesses. I constantly search my blog history, StockTwits stream, and stream for missed trades, failed trades, and aspects of my strategy that I can improve on. I’ve noticed recently something that I would like to focus on improving this quarter, something that has cost me a good deal of gains, but not one of those things that has lost me money.

I’m talking about not coming back to stocks after they have either been on the watch list, broken down and been thrown off, or stocks that I have taken entries to, been stopped out of, and not revisited.

Let’s deal first with the former. My watch list is put together by screening for stocks using both fundamental and technical statistics. I do more research on those that make it through the screens and reside in industries that I am currently focusing on. Only those that show promising technical patterns make it to the final watch list I look at on a daily basis. And when a stock on the watch list breaks down technically, I throw it off. It will most likely show up in the screens again, but until its technical picture improves, it doesn’t get back on to the watch list.

The issue that I am seeing is that for those stocks I have done a good deal of work on and have great fundamental conviction in, they don’t make it back on to the watch list fast enough, and I can see myself being biased against them for being thrown off in the recent past.

I am not being quick enough to give stocks a second chance to get back in front of my face on a day to day basis. I will use two very specific examples, (NASDAQ:CTRP) and BRF Brasil Foods (NYSE:BRFS). These are two stocks that I have not traded in quite a while, but have been on and off the watch list quite a few times. Both have recently broken out of great bases, bases that I was well aware of, but chose to ignore because of their breakdowns a few months ago. These are two stocks I should be in right now. I need to do a better job of recognizing when a great name has technically healed and has a chance to play catch up with the leaders in its group, in this instance CTRP with (PCLN).

The second issue I’m seeing in my trading is my unwillingness to revisit names that I have recently taken trades in and been stopped out of for small losses. Sometimes stocks just need more time, and getting stopped out once should not deter you from taking another entry if the stock sets up again and you have great fundamental conviction. I’m talking specifically about Rackspace (NYSE:RAX) here. This is a stock that I traded before the big breakout, took a very small loss, it was actually a great sell, but never revisited the stock on the second try, when it succeeded in breaking out. I could feel myself biased against this stock because of the recent shakeout. I need to do a better job of not writing off recent positions.

We had a great third quarter but I can find spots where it could have been far better. These are two things I will be focusing on as we enter the fourth quarter.